Based on the scientific evidence, kept in the legendary book „The Intelligent Investor“ by Benjamin Graham, we calculate for you the following key figures. These will be indicated for the first 100 best companies of an analyzed index.
The price-to-book ratio (P/B ratio) is an asset-related indicator for assessing the stock market valuation of a company. In this case, the price of an individual stock is placed in relative to its proportionate book value.
The traditional theory of value investing implies that a stock is even less expensive, the lower the company’s P/B ratio is, and that the company’s fair value is roughly equivalent to its book value.
The book value per share is placed in relative to the stock price. If the P/B ratio quote is below 1, then the stock price is lower than the intrinsic value of the company, while a P/B ratio larger than 1 could indicate an overvaluation.
Therefore the P/B ratio should not quote above 1.5. („The intelligent investor“, Graham, 2011: 371)
Stable dividend yields
The company should have stable dividends paid within the last 10 years.
Net Current Asset Value per Share
Another well-known conservative analysis of Graham is the Net-Net rule. (Greenwald et al, 2001: 197) Here, the investor is interested in the Net Current Asset Value of the company (current assets minus liabilities). (Lowe, 1997: 56)
Thus the Net Current Asset Value is a rule of thumb how much a company would be worth it for the shareholders if it would be discontinued and liquidated.
If this value was higher than the stocks’ market price, this caught Graham‘s attention. (Lowe, 1997: 56) However, that is no clear evidence for an undervaluation of a stock.
We point out the NCAVPS by dividing the net asset value by the current shares outstanding.
It now becomes interesting, when the current stock price is quoting below the NCAVPS. According to Graham, investors will benefit greatly if they invest in companies where the stock prices are no more than 67% of their NCAV per share.
A study done by the State University of New York to prove the effectiveness of this strategy showed that from the period of 1970 to 1983 an investor could have earned an average return of 29.4%, by purchasing stocks that fulfilled Graham‘s requirement and holding them for one year.
Companies that show these characteristics are also called Net-Nets.
We show that, on the one hand if the current stock price is below the current NCAVPS, on the other hand, if it quotes below 67% of the NCAVPS.
There are not many stocks trading below its NCAVPS. However, it is worth observing, as an exaggerating stock market may lead to the mentioned condition but also when companies are in crisis, just before a turn-around.
In 1929, after the stock market crash, Graham found many companies of this kind. Nowadays it is much more difficult, however, new situations of this kind arrive all the time. (Otte and Castner, 2011: 145)
Moderate P/E ratio
The P/E ratio should not exceed more than 15 on average for the last three years. („The intelligent investor“, Graham, 2011: 371)
However, if the P/E ratio is below 15, the P/B ratio could be higher. (Otte and Castner, 2011: 118) Finally, the product of P/E ratio and P/B ratio should not exceed 22.5 (the number results from 15 times the company’s profit multiplied by 1.5 times its book value). („The intelligent investor“, Graham, 2011: 371)
These approaches concern mainly the defensive investor. (Otte and Castner, 2011: 118) The criteria can usually be met only by large, powerful companies. („The intelligent investor“, Graham, 2011: 371)